Horattas v. Citigroup Financial Markets Inc.

• Citation: 532 F.Supp.2d 891
• Decision Date: 12 September 2007
• Docket Number: No. 1:07-cv-122.,1:07-cv-122.
• Parties: George HORATTAS, Andrew Phythian, Dianne Phythian, Robert Cochran, and Constance Cochran, Plaintiffs, v. CITIGROUP FINANCIAL MARKETS INC. a/k/a Smith Barney Citigroup<SMALL><SUP>1</SUP></SMALL>, Mark A. Singer, Fondren International, Inc., Indian Nation LLC d/b/a CRS Management of, Michigan LLC, Summerfield LLC, Quest Minerals and Exploration Inc., Clayton Smart, Stephen W. Smith, Christine M. Heisey, Erma L. Huckstep, and Craig Bush, Defendants.
• Court: U.S. District Court — Western District of Michigan

532 F.Supp.2d 891

George HORATTAS, Andrew Phythian, Dianne Phythian, Robert Cochran, and Constance Cochran, Plaintiffs, v. CITIGROUP FINANCIAL MARKETS INC. a/k/a Smith Barney Citigroup¹, Mark A. Singer, Fondren International, Inc., Indian Nation LLC d/b/a CRS Management of, Michigan LLC, Summerfield LLC, Quest Minerals and Exploration Inc., Clayton Smart, Stephen W. Smith, Christine M. Heisey, Erma L. Huckstep, and Craig Bush, Defendants.

No. 1:07-cv-122.

United States District Court, W.D. Michigan, Southern Division.

September 12, 2007.

Amber M. Nesbitt, Edward A. Wallace, Wexler Toriseva Wallace LLP, Chicago, IL, Daniel P. Steele, Vandeveer Garzia, PC, Troy, MI, for Plaintiffs.

M. Brian Cavanaugh, Butzel Long PC, Lansing, MI, Joseph Michael Rogowski, II, Berry Reynolds & Rogowski, PC, Karyn Ann Thwaites, Zausmer Kaufman August Caldwell & Tayler, PC, Farmington Hills, MI, Peter C. Jensen, Miller Canfield Paddock & Stone PLC, Saginaw, MI, Harold D. Pope, Jeffrey G. Heuer, Jaffe Raitt Heuer & Weiss PC, Southfield, MI, Nicole R. Foley, Jaffe, Raitt, Heuer & Weiss, P.C., Detroit, MI, for Defendants.

OPINION and ORDER

PAUL L. MALONEY, District Judge.

Dismissing the Complaint With Prejudice Denying as Moot Zausmer's Motion to Intervene in Place of the Named Plaintiffs Terminating Case

This putative class action was removed from state court. It comes before the court on defendant Citigroup Financial Market, Inc. d/b/a Smith Barney Citigroup ("Citigroup")'s motion to dismiss. In addition, non-party Zausmer, the conservator of the cemeteries and management companies at issue, has filed a motion to intervene and a motion to dismiss the named plaintiffs as parties. The parties disagree over whether the plaintiffs' claims are governed by the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), 15 U.S.C. § 77 et seq., and, if so, whether that Act requires dismissal or merely remand to state court. For the reasons that follow, the court will grant Citigroup's motion to dismiss the complaint with prejudice.

I. BACKGROUND

George Horattas and the other four named plaintiffs (collectively "Horattas") are all Michigan residents² who purchased burial rights and burial plots in Oakview Cemetery or Cadillac Memorial Gardens, see Comp. ¶¶ 5-7. both of which are apparently located in Michigan. Defendant Craig Bush owned both cemeteries until August 2004, when he sold them to defendant Indian Nation LLC d/b/a CRS Management of Michigan LLC ("Indian Nation"). Id. ¶ 11. At least at the time the complaint was filed, defendants Clayton Smart and Stephen Smith owned 95% and 5% of Indian Nation, respectively. Id. ¶ 11.

The Michigan Cemetery Regulation Act requires cemeteries to deposit 15% of the gross proceeds from the sale of burial rights into an irrevocable endowment care fund, to ensure that the burial plots and the cemeteries generally are properly maintained in perpetuity. MCL §§ 456.35a, 456.107a, and 456.536(1); see, e.g., Cemetery Comm'r v. Burcham, No. 201437, 1998 WL 1988776 (Mich.App. Nov.17, 1998) ("Plaintiff essentially alleged that defendant [cemetery] had knowingly made false representations to plaintiff's auditor with respect to the value and financial status of certain statutorily required trust funds."), app. denied, 461 Mich. 992, 610 N.W.2d 921 (2000). By August 2004, the two cemeteries at issue had accumulated $41 million in irrevocable endowment care funds. See Comp. ¶ 2.

Accord to the complaint, by September 2006, new owner Indian Nation had depleted all of those funds, in violation of Michigan law. Horattas alleges that Indian Nation spent the funds approximately as follows: $12 million to finance Indian Nation's purchase of the cemeteries themselves; $26 million as a "loan" to an oil and gas exploration venture owned and operated by defendant Smart's wife and her aunt (defendant Quest Minerals and Exploration Inc.); $25 million as an "investment" in defendant Fondren International Inc.; and $7 million as an investment in what he describes a "speculative, high-risk offshore hedge fund in the Cayman Islands." Comp. ¶ 2. The other defendants thus far not named in this opinion allegedly served as investment advisors, "wire" agents, or other participants in the transfer, investment, or expenditure of the endowment funds. See Comp. ¶¶ 8-17.

Namely, Horattas alleges that in August and September 2004, the cemeteries' trust accounts were transferred from LaSalle Bank to Citigroup. See Comp. ¶ 8. The defendants elaborate that shortly after Citigroup acquired the cemeteries' accounts, various securities were sold from these accounts in late September and early October 2004, including shares in mutual funds and direct shares in companies such as Bristol-Myers Squibb, Texas Instruments, Wells Fargo, GE, etc. See Def. Citigroup's Supp. Br. in Support of Mot. to Dis. at 6 and Ex. A. Horattas' alleges that these security sales were done for improper and illegal purposes, and that Citigroup and the other defendants breached their duty to act as a prudent investor would. Specifically, Horattas alleges that Citigroup and the other defendants failed to exercise reasonable caution with the trust funds, failed to diversify their investments, and recommended unsuitable speculative and high-risk investments. Comp. ¶ 54.

II. PROCEDURAL HISTORY

In December 2006, the State of Michigan's Cemetery Commissioner filed a complaint in the Ingham County Circuit Court ("the state court"), seeking injunctive relief and the appointment of a conservator for the cemeteries. Comp. ¶ 2. The state court appointed Mark Zausmer as conservator of 28 cemeteries, including those in which the named plaintiffs bought their burial rights and plots, and their management companies.

Horattas brought suit in that court in January 2007, asserting two state-law causes of action against the defendants: breach of fiduciary duty and violation of the prudent-investor rule (MCL § 700.1501 et seq.), see Comp. ¶¶ 43-47; and conversion and embezzlement of the $61 million in irrevocable-endowment care funds, see Comp. ¶¶ 58-62. Horattas's third count seeks to impose a constructive trust on those funds to prevent unjust enrichment. See Comp. ¶¶ 63-68. In March 2007, defendants Citigroup and Mark Singer filed a notice of removal, and all the other defendants Med timely notices consenting to the removal. Bush filed an answer to the complaint.

In April 2007, conservator Zausmer moved to intervene and to dismiss Horattas and the other named plaintiffs as parties, contending that as the court-appointed conservator, he is the only proper party to bring an action for violation of the Michigan Cemetery Regulation Act and that Horattas et al. have no right to do so. Horattas moved to transfer the case to the United States District Court for the Eastern District of Michigan pursuant to 28 U.S.C. § 1404(a).

Also in April 2007, defendant Citigroup joined in conservator. Zausmer's motion to substitute Zausmer for Horattas et al. as parties plaintiff, or alternately, to dismiss the complaint with prejudice under Rule 12(b)(6) (failure to state a claim) as precluded under SLUSA.

In June 2007, this court denied Horattas's motion for transfer of venue on the ground that Horattas had not shown that the case could be maintained in the Eastern District. See Horattas v. Citigroup Fin. Markets, Inc., No. 1:07cv122, 2007 WL 1876470 (W.D.Mich., June 28, 2007) (Hon. Wendell A. Miles, Senior D.J.).³ This court noted that if SLUSA applied, the case could not be maintained in federal district court in the Eastern District of Michigan (or in any federal district court, for that matter, due to the "local controversy" exception). Id. at *2. Specifically, if SLUSA applies and Horattas's putative class claims satisfy its criteria, a federal district court must dismiss the class claims with prejudice. Id. at *3. If SLUSA applies but the state-court class action does not satisfy all its criteria, a federal district court must remand the class claims to be pursued in state court. Id. The court ordered the parties to file briefs as to whether SLUSA applies and, if so, whether SLUSA requires remand to state court or outright dismissal. Id. The parties did so.

III. LEGAL STANDARD:

A. Motion to Dismiss for Failure to State a Claim, FED. R. CIV. P. 12(b)(6)

To survive a motion to, dismiss for failure to state a claim wider Federal. Rule of Civil Procedure 12(b)(6), Horattas must show that his complaint alleges facts which, if proved, would entitle him to relief. First American Title Co. v. Devaugh, 480 F.3d 438, 443 (6th Cir.2007) (Griffin, J.) (citing Southeast Texas Inns, Inc. v. Prime Hospitality. Corp., 462 F.3d 666, 671 (6th Cir.2006) (citing Conley v. Gibson, 355 U.S. 41, 45, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957))). The complaint must contain either direct or inferential allegations with respect to all material elements necessary to sustain a recovery under some viable legal theory.⁴ Weisbarth v. Geauga Park Dist., 499 F.3d 538, 540-41 (6th Cir.2007) (citing Weiner v. Klais & Co., 108 F.3d 86, 88 (6th Cir.1997)). The court must accept all well-pleaded factual allegations as true. Id.⁵

In the SLUSA context, this means that the court must construe the complaint in the light most amenable to the conclusion that the complaint is not subject to SLSA preclusion (i.e., as discussed below, that Horattas's class claims should be merely remanded to state court rather, than dismissed with prejudice). See generally Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 395 F.3d 25 (2d Cir. 2005) (applying Rule 12(b)(6) standard in SLUSA context), overruled on other grounds, 547 U.S. 71, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006); cf. PR Diamonds, Inc. v. Chandler, 364 F.3d 671, 683 (6th Cir.2004) ("The PSLRA does not changed the Rule 12(b)(6) maxim that when an allegation is capable of more than one inference, it must be construed in the plaintiff's favor.") (citing Helwig Vencor, Inc., 251 F.3d...